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29.12.202223:53 Forex Analysis & Reviews: The euro paused

At the end of the year, investors decided to rest and not force events, which resulted in consolidation of key financial assets, including dollar currency pairs. The hopes of a Santa Claus rally in the U.S. stock market are fading day by day, and along with it are bulls' hopes of launching new attacks. U.S. stock indices were already spooked by the approaching recession, and now the early opening of the Chinese economy brings more uncertainty. Would a surge in mortality cause China to fall back into lockdowns? Won't Chinese travelers spread the disease around the world, as they did in 2020?

2022 was a real disaster for stock markets. Global stock indices lost 20% of their value, the global bond market index fell 16%. All of this was happening while inflation accelerated to the highest levels in decades and aggressive tightening of monetary policy by central banks led by the Federal Reserve. Things began to change for the better in the fourth quarter as the Fed announced it was slowing the pace of rate hikes, which improved global risk appetite and weakened the U.S. dollar. EURUSD added more than 10%, but the rally was put on pause at the end of the year.

Investors hope that all the worst about the recession in the eurozone economy is already taken into account in the quotes of the major currency pair, while the approaching decline in the US economy is an important argument for buying the euro against the US dollar. However, once the frost arrives in Europe and the Fed provides the US with a soft landing, the situation will change dramatically. A strong labor market could allow Americans to avoid a recession. Nearly 90% of Financial Times analysts believe the currency bloc has already plunged into it.

Eurozone economic growth forecasts

Exchange Rates 29.12.2022 analysis

The futures market predicts that the European Central Bank will be more aggressive than the Fed in 2023. It will raise the deposit rate by 140 bps, while the federal funds rate will rise by only 50-75 bps. However, if U.S. inflation starts to accelerate again, Fed Chairman Jerome Powell and his colleagues are unlikely to remain cautious. They will move on to decisiveness.

Exchange Rates 29.12.2022 analysis

Thus, 2023 promises plenty of uncertainty for investors. How will China's economic opening go? Will China spread the disease around the world? Where will U.S. inflation go? And will the cold weather spoil the European economy? These four key questions will affect both the stock market and the currency market. They will determine investors' appetite for risk and set the direction of the EURUSD.

Technically, nothing has changed on the daily chart of the main currency pair. The euro is frozen in the consolidation at $1.0575-1.0655 and from time to time it is testing its limits. It is unsuccessful so far, but sooner or later the trading range will be replaced with a new trend. So, should we abandon our previous strategy of placing pending long and short positions?

*这里的市场分析是为了增加您对市场的了解,而不是给出交易的指示。

Marek Petkovich,
Analytical expert of InstaSpot
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